Fast-track MSR introduction

EIGHT, five, six, four, and now five euros per tonne. Price volatility so far this year show how Europe’s emissions cap and trade market (ETS) remains bumpy, weak and thus ineffective at changing behaviours. The plot line below is hardly a curve.


2016 EUA spot (€) via EEX.

But weren’t such instabilities supposed to have been fixed? An ETS ‘market stability reserve’ (MSR), agreed last year and operating as from 2019, is intended to adjust allocation, stabilise supply-demand balance and so steady prices.

Evidently it is yet to have such an effect. Consequently levels of confidence in a meaningful ETS contribution to urgent EU GHG emission reductions and clean-tech innovation are back in the doldrums.

If the scheme is not to be abandoned then the next few months are crucial. Five or more years of waiting would be too late as in all quarters political support ebbs away. Trust in ETS should be restored without delay, within the proposed amending act now before Parliament and Council.

Ah … but if only it were so easy,” some may reply.

It’s true the MSR negotiations were sometimes fraught. But in the end EU institutions did find a reasonable outcome on its general design, including start date, trigger thresholds, treatment of back-loaded and other unused allowances, reporting and review. None of these elements need now be re-opened.

However by far the biggest issue the ETS still struggles with is the huge surplus of excess tickets swamping the market. Under present rule, it will take around a decade to move most of these to the reserve, thus prolonging the market instability pictured above.

But what if initial MSR transfers could happen more swiftly? What if e.g. instead of 12% each year of surplus allowances moved from auctions to reserve  (applied at 1% per month) this rate is doubled for the first three years (24% per year, 2% per month)?

The impact of such an amendment, assuming 2.7 billion allowances in 2017 circulation, would be an extra 750 million tonnes approximately set aside, on top of a similar amount under the exiting rule. If a 24% rate ran for 4 years, the extra would be around 900 million.

Here is how the amendment could look in the present proposal :

Amendment X
Article X new
Amendment to Decision (EU) 2015/1814

Decision (EU) 2015/1814 is amended as follows:

In Article 1 the following paragraph is inserted after paragraph 5:

5a. In derogation from the first sentence of paragraph 5, for the years 2019, 2020 and 2021, the number of allowances that shall be deducted from the auctioned allowances and placed in the reserve shall be equal to 24% of the total number of allowances in circulation.

Such an amendment can in theory be tabled by any EU institution although in practice EP 1st reading committee deadlines have passed. Therefore this points to one or more Council delegations or the Commission that should act first.Since in terms of a reversal to single market harmonisation the EC has the most to loose if ETS is lost, it should act now. ( Article 250 empowers the Commission to amend proposals at any time during negotiations.)

Both senior EC officials and the EP rapporteur Ian Duncan have in recent days signalled that MSR adjustment is an option that should be considered.

Lastly it is worth reminding that an MSR amendment will remain consistent with the 2030 framework agreed by the European Council two years ago, in particular section 2.3 which specifically endorses “an instrument to stabilise the market“. ❧

Ed Davey says not thief-in-waiting

Davey DECC has replied to my 17 July question Is Ed Davey a thief in waiting? The letter says the UK is not advocating the confiscation of private property by way of cancelling ETS allowances already in market circulation. Full text herewith. Screenshot 2014-07-31 at 1.36.45 PMSome questions remain however.

First, why did the UK issue a vague policy paper when it could (or should) have issued a clearer one? Existing ETS allowances owners would have been reassured their property will retain its value. In turn, those in EU institutions could not be asked to vote against ETS reforms based allowance owners’ fears of being cheated.

Second, if the allocation of fewer ETS allowances needs new legislation (as most expect) wouldn’t it be helpful to say so now in clear terms so that different specific options can be compared?

  • For example, is the UK concept compatible with the EC proposal for a Market Stability Reserve (MSR)? (I suspect not.)
  • Is the EC MSR plan the right instrument with the wrong parameters? (I suspect so.)
  • How do the years up to and then after 2020 relate to each other?
  • Could the Linear Reduction Factor (Article 9) be adjusted in effect to soak-up the surplus in the market and if so from when?
  • Will UK table MSR amendments in the Council working group? If so saying what precisely?
  • What new legal provisions are best left for the main legislative proposal to be tabled in the new mandate?

Finally, if the UK reconsiders and changes its position, will it revise or replace its 16 July policy paper? I hope so.